<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
for the Quarter Ended September 30, 1998
Commission file number 1-9613
------
Pacific Pharmaceuticals, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3258753
----------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
6730 Mesa Ridge Road, Suite A, San Diego, CA 92121
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 550-3900
----------------------------------------------------
(Registrant's Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
As of November 13, 1998, there were 12,225,912 shares of the registrant's Common
Stock, $.02 par value outstanding.
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
INDEX
<TABLE>
<S> <C>
Cautionary Statement Under the Private Securities
Litigation Reform Act of 1995..........................................................1
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
September 30, 1998 and March 31, 1998 ...............................2
Consolidated Statements of Operations--Three Months and Six
Months Ended September 30, 1998 and 1997 (as restated) and
from September 23, 1983 (inception) to September 30, 1998............3
Consolidated Statements of Stockholders'
Equity/(Deficiency) - Six Months Ended
September 30, 1998 and 1997 (as restated)............................4
Consolidated Statements of Cash Flows--Six Months Ended
September 30, 1998 and 1997 and from September 23, 1983
(inception) to September 30, 1998....................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Proposed Merger.....................................................14
Item 6. Exhibits and Reports on Form 8-K....................................15
SIGNATURE ....................................................................15
</TABLE>
<PAGE>
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements in this Quarterly Report on Form 10-Q under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
"Notes to Consolidated Financial Statements", and in Item 5, "Proposed Merger",
as well as oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf, that are
not historical fact constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
involve risks and uncertainties, including, but not limited to, the risk that
the Company may not be able to obtain additional financing, if necessary; the
risk that the Company may not be able to continue the necessary development of
its operations on a profitable basis, or that the merger between the Company and
Procept, Inc. will be consummated and, if consummated, be successful. In
addition, the Company's business, operations and financial condition are subject
to reports and statements filed from time to time with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1998 and this Quarterly Report on Form 10-Q.
1
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 March 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,285,460 $3,290,176
Accounts receivable, net 201 -
Inventory 54,587 38,637
Prepaid expenses 98,068 85,053
- ----------------------------------------------------------------------------------------------
Total current assets 4,438,316 3,413,866
Property and equipment, net 59,658 71,840
Patent costs, net 144,274 104,981
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $4,642,248 $3,590,687
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $620,444 $661,371
Accrued expenses 218,287 201,125
Current portion of capital leases 4,271 4,066
- ----------------------------------------------------------------------------------------------
Total current liabilities 843,002 866,562
- ----------------------------------------------------------------------------------------------
Capital leases 20,396 22,584
Minority interest 4,731,594 -
- ----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY/(DEFICIENCY):
Convertible preferred stock, $25 par value, 2,000,000
shares authorized; 36,882 and 40,090 issued and
outstanding at September 30,1998 and March 31, 1998,
respectively 922,088 1,002,288
(liquidation preference $9,589,320 and $10,423,400,
respectively)
Commonstock, $.02 par value, 100,000,000 shares authorized;
12,225,912 and 10,777,234 shares issued and outstanding
at September 30, 1998 and March 31, 1998, respectively 244,516 215,545
Capital in excess of par value 48,298,469 46,969,197
Deficit accumulated during the development stage (50,417,817) (45,485,489)
- ----------------------------------------------------------------------------------------------
Total stockholders' equity/(deficiency) (952,744) 2,701,541
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICENCY) $4,642,248 $3,590,687
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
September 23, 1983
----------------------------------- --------------------------------- (inception) to
1998 1997 1998 1997 September 30, 1998
- ---------------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES (as restated) (as restated)
Product sales $ - $ - $ 4,016 $ 700 $2,023,757
License fees and royalties - 92 - 187 486,612
Contract research - - - - 268,063
Marketing rights - - - - 1,311,500
Interest and other 57,213 65,171 99,354 165,659 2,013,012
- ---------------------------------------------------------------------- ----------------------------------- --------------------
Total revenues 57,213 65,263 103,370 166,546 6,102,944
- ---------------------------------------------------------------------- ----------------------------------- --------------------
COSTS AND EXPENSES
Cost of product sales 7,561 21,319 27,578 35,321 3,165,973
Product development 594,825 661,365 980,468 1,022,264 18,141,429
General and administrative 376,238 663,469 777,568 1,198,244 18,629,315
Business development
and marketing 4,731 48,382 22,556 122,240 3,799,445
Interest and other 5,895 929 18,622 54,127 652,597
- ---------------------------------------------------------------------- ----------------------------------- --------------------
Total costs and expenses 989,250 1,395,464 1,826,792 2,432,196 44,388,759
- ---------------------------------------------------------------------- ----------------------------------- --------------------
Loss applicable to
minority interest 85,475 - 85,475 - 85,475
Net loss (846,562) (1,330,201) (1,637,947) (2,265,650) (38,200,340)
- ---------------------------------------------------- ---------------- ---------------------------------------------------------
Convertible preferred stock
dividends - 1,612,908 3,294,381 3,427,988 12,217,477
Net loss applicable to
common shareholders $ (846,562) $ (2,943,109) $ (4,932,328) $ (5,693,638) $ (50,417,817)
- ---------------------------------------------------------------------- ---------------------------------------------------------
Net loss per share of common
stock - basic and diluted ($0.07) ($0.34) ($0.44) ($0.68)
- ---------------------------------------------------------------------- -----------------------------------
Weighted average common
stock outstanding 11,444,811 8,566,292 11,257,469 8,363,374
- ---------------------------------------------------------------------- -----------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY) (unaudited)
<TABLE>
<CAPTION>
Convertible Preferred Stock Commonon Stock
----------------------------------- ---------------------------------
Shares Par Value Shares Par Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1997 (as restated) 50,000 $1,250,038 8,151,029 $163,021
Exercise of warrants 356,250 7,125
Conversion of preferred stock into common stock (5,882) (147,050) 1,225,419 24,508
Preferred stock unit purchase option
compensation for financial advisory services
Convertible preferred stock dividends (as restated)
Net loss
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (as restated) 44,118 $1,102,988 9,732,698 $194,654
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 40,090 $1,002,288 10,777,234 $215,545
EXERCISE OF WARRANTS 1,563 31
COMMON STOCK ISSUED FOR SERVICES 482,979 9,660
PREFERRED STOCK UNIT PURCHASE OPTION AS
COMPENSATION FOR FINANCIAL ADVISORY SERVICES
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK (3,208) (80,200) 964,136 19,280
CONVERTIBLE PREFERRED STOCK DIVIDENDS
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE
NET LOSS
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 36,882 $922,088 12,225,912 $244,516
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital During the
in Excess Development
of Par Value Stage Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1997 (as restated) $38,805,489 ($33,887,139) $6,331,409
Exercise of warrants 327,750 334,875
Conversion of preferred stock into common stock 122,542 -
Preferred stock unit purchase option
compensation for financial advisory services 165,800 165,800
Convertible preferred stock dividends (as restated) 3,427,988 (3,427,988) -
Net loss (2,265,650) (2,265,650)
- ----------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 (as restated) $42,849,569 ($39,580,777) $4,566,434
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $46,969,197 ($45,485,489) $2,701,541
EXERCISE OF WARRANTS 1,438 1,469
COMMON STOCK ISSUED FOR SERVICES 177,840 187,500
PREFERRED STOCK UNIT PURCHASE OPTION AS
COMPENSATION FOR FINANCIAL ADVISORY SERVICES 138,165 138,165
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK 60,920 -
CONVERTIBLE PREFERRED STOCK DIVIDENDS 374,056 (3,294,381) (2,920,325)
PROCEEDS FROM SUBSIDIARY PREFERRED STOCK ISSUANCE 576,853 576,853
NET LOSS (1,637,947) (1,637,947)
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 $48,298,469 ($50,417,817) ($952,744)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30 September 23, 1983
---------------------------------- (inception) to
1998 1997 September 30, 1998
- ---------------------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($1,637,947) ($2,265,650) ($38,200,338)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,624 43,324 1,701,625
Loss allocated to minority interest (85,475) - (85,475)
Non-cash expense upon issuance of common stock
options, common stock and warrants 325,665 165,800 1,177,526
Net book value of asset disposals 3,704 58,534 245,396
Option income from retirement of stock
or amounts previously advanced by customer - - (400,000)
Changes in assets and liabilities:
Accounts receivable (201) 84,879 (201)
Inventory (15,950) (27,895) (54,590)
Prepaid expenses and other assets (13,015) (74,070) (109,043)
Accounts payable (40,927) (185,460) 620,444
Accrued expenses 17,162 58,261 74,264
Customer advances - - 140,863
Other liabilities - - (4,866)
- ---------------------------------------------------------------------------------------------- ------------------------
Net cash used by operating activities (1,410,360) (2,142,277) (34,894,395)
INVESTING ACTIVITIES
Purchases of short-term investments - - (10,461,867)
Maturities of short-term investments - 1,488,215 10,461,867
Capital expenditures (3,627) (12,776) (851,556)
Patent costs (63,812) (44,208) (1,041,184)
Other 206 - 8,035
- ---------------------------------------------------------------------------------------------- -------------------------
Net cash provided (used) by investing activities (67,233) 1,431,231 (1,884,705)
FINANCING ACTIVITIES
Issuance of notes payable - - 2,183,867
Repayment of notes payable - - (1,965,124)
Repayment of capital lease obligations (2,188) (1,917) (185,735)
Long-term customer advances - - 100,000
Issuance of common and preferred stock 578,322 334,875 39,034,809
Minority interest investment in subsidiary 1,896,744 - 1,896,744
- ---------------------------------------------------------------------------------------------- -------------------------
Net cash provided by financing activities 2,472,877 332,958 41,064,560
- ---------------------------------------------------------------------------------------------- -------------------------
Net increase (decrease) in cash
and cash equivalents 995,284 (378,088) 4,285,460
Cash and cash equivalents at beginning of period 3,290,176 1,784,599 -
- ---------------------------------------------------------------------------------------------- -------------------------
Cash and cash equivalents at end of period $4,285,460 $1,406,511 $4,285,460
- ---------------------------------------------------------------------------------------------- -------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPLES OF INTERIM PERIOD REPORTING
The consolidated financial statements include the accounts of Pacific
Pharmaceuticals, Inc. and its wholly owned subsidiaries, Perio Test, Inc., XYX
Acquisition Corp. and BG Development Corp., a majority owned subsidiary,
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
The Company has not earned significant revenues from planned principal
operations. Accordingly, the Company's activities have been accounted for as
those of a "Development Stage Enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("FAS 7"). Among the disclosures required by
FAS 7 are that the Company's financial statements be identified as those of a
development stage enterprise, and that certain consolidated financial
statements disclose activity since the date of the Company's inception.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual
results may differ from those estimates.
In the opinion of the Company, the unaudited consolidated financial statements
contain all of the adjustments, consisting only of normal recurring adjustments
and accruals, necessary to present fairly the financial position of the Company
as of September 30, 1998 and March 31, 1998, results of operations for the six
months ended September 30, 1998 and 1997 (as restated) and from September 23,
1983 (inception) to September 30, 1998 and cash flows for the six months ended
September 30, 1998 and 1997 and from September 23, 1983 (inception) to
September 30, 1998. The results of operations for the six months ended
September 30, 1998 are not necessarily indicative of the results to be expected
in subsequent periods or for the year as a whole. For further information,
refer to the consolidated financial statements and footnotes thereto as set
forth in the Company's Annual Report on Form 10-K for the year ended March 31,
1998.
The Company adopted Financial Accounting Standards Board Statement No. 128
("FAS 128"), EARNINGS PER SHARE (EPS). This statement requires the presentation
of earnings per share to reflect both "Basic EPS" as well as "Diluted EPS" on
the face of the statement of operations. In general, Basic EPS is a function of
weighted average number of common shares outstanding for the periods. Diluted
EPS does reflect the potential dilution created by stock issuable pursuant to
outstanding options, warrants, convertible debt or equity securities and other
contingently issuable shares. The requirements of FAS 128 have been applied
retroactively to all periods presented. There was no impact on reported net
loss per common share as a result of the adoption of this FAS.
2. BGDC PRIVATE PLACEMENT FINANCING AND MINORITY INTEREST
During the six months ended September 30, 1998, the Company entered into a
placement agency agreement with Paramount Capital Inc. ("Paramount"). Under the
terms of the agreement, Paramount was to use its best efforts to sell up to 60
Units (with an overallotment option for an additional 40 Units) for
6
<PAGE>
$100,000 each, which consist of 50,000 shares of Series A Convertible
Preferred Stock ("BGDC Units"), valued at $2.00 per share of BG Development
Corp. ("BGDC"). The BGDC Units are redeemable in cash by BGDC and the BGDC
Units may be exchanged for cash or common stock of the Company under the
circumstances described in the subscription agreement between the Company and
shareholders of BGDC. Pursuant to the subscription agreement, seventy-five
percent of the net proceeds are allocated to BGDC for development costs
associated with O(6) Benzylguanine technology. Twenty-five percent of the net
proceeds of the BGDC private placement went to the Company to be used for
general purposes.
The BGDC Units accrue dividends as follows:
<TABLE>
<CAPTION>
Dividend Date Dividend Amount
------------- ----------------
<S> <C>
Upon final closing $1.99 per share
30-36 months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
48-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company completed a closing on 29.35 BGDC Units of the
private placement for gross proceeds of $2,900,000 (net proceeds of
$2,455,000). Paramount, who is affiliated with certain significant shareholders
of the Company, received an aggregate dollar commission of $264,000 and a non-
accountable expense allowance of $117,000 as compensation for the BGDC private
placement. Additionally, Paramount received warrants to purchase 10% of the
number of BGDC Units issued in private placement at $110,000 per unit. BGDC and
Paramount also entered into a 24 month Financial Advisory Services Agreement in
which BDGC will pay Paramount $3,000 per month for such services plus warrants
("Advisory Warrants") to purchase 15% of the number of BGDC Units issued in the
private placement at $110,000 per Unit. The Company valued the Advisory
Warrants at $88,000 and is amortizing these advisory services over a 24 month
period ending in June 2000.
Subsequent to the closing of the private placement, BGDC Preferred Stockholders
own 16.4% of voting rights in BGDC. This minority interest, as reflected in the
accompanying Consolidated Balance Sheet as of September 30, 1998, includes the
initial net proceeds to BGDC of $1,886,000, plus the initial dividend of
$2,920,000, or $1.99 per preferred share outstanding, paid in capital
associated with the amortization of the Advisory Warrants and 16.4% of BGDC's
operating loss through September 30, 1998.
BGDC and the Company have entered into a one-year renewable Corporate Services
and Management Agreement pursuant to which the Company will provide
financial/accounting, administrative, advisory and managerial support to BGDC.
For such services, the Company will receive from BGDC a management fee equal to
$500,000 per year, payable in equal monthly installments. The Company does not
expect any further closings to occur for the private placement.
3. DELISTING FROM THE AMERICAN STOCK EXCHANGE
On September 18, 1998, the Company's common stock was removed from trading on
the American Stock Exchange ("AMEX") because the Company no longer satisfied
all of the financial guidelines of the AMEX for continued listing. The
Company's common stock began trading on the NASD Electronic Bulletin Board on
September 21, 1998 under the ticker symbol PHAA.
7
<PAGE>
4. NON-CASH CONVERTIBLE PREFERRED STOCK DIVIDENDS
In fiscal year 1997, the Company completed a private equity financing ("1997
Private Placement") in two stages with the initial closing completed on
December 19, 1996 (the "Initial Closing") and the final closing completed on
March 7, 1997 (the "Final Closing") in which it raised $8,542,000, net of
offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 detachable Common
Stock Purchase Warrants ("Warrants"), to accredited individuals and
institutional investors pursuant to Regulation D under the Securities Act of
1933, as amended. Each Warrant entitles the holder to purchase one share of
Common Stock at a price of $1 per share and may be exercised until March 7,
2007.
The initial conversion ratio for the Preferred Stock was 208.33 shares of
Common Stock for each share of Preferred Stock. The 1997 Private Placement
contained an adjustment provision to reset the conversion ratio under certain
conditions. For Preferred Stock converted after March 7, 1998, the new
conversion ratio is 290.89 shares of common stock for each share of Preferred
Stock.
The subscribers to the Private Placement purchased the Units at a discount from
the closing prices of the Company's common stock on the Initial Closing date of
23% and the Final Closing date of 36%. The detachable stock purchase warrants
issued as part of the Units had a fair value at the date of issuance of
$1,967,000. The aggregate value of the beneficial conversion feature and
warrants at the date of issuance was $6,721,000 and has been recognized as a
return to the Preferred Stockholders from the date of issuance of the Preferred
Stock to the date in which the Preferred Stock was eligible for conversion into
Common Stock. The reset of the conversion ratio during March 1998 generated an
additional non-cash dividend of $2,576,000.
As discussed in Note 2, the BGDC private placement includes a provision that
the subscribers are entitled to receive $1.99 per share dividends declared by
to Board of Directors of BGDC. The dividends of $2,920,000, which have been
credited to minority interest during the six months ended September 30, 1998,
accumulate until paid in cash or common stock by BGDC.
Below is a summary of Preferred Stock Dividends recognized during the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30, September 23, 1983
------------------------------- ------------------------------ (inception) to
Description 1998 1997 1998 1997 September 30, 1998
----------- ------------- --------- ------------ -------------------------
(as restated) (as restated)
<S> <C> <C> <C> <C> <C>
Dividend from beneficial
conversion feature - 1,152,031 128,036 2,448,393 4,754,075
Dividend from reset of conversion - - 194,752 - 2,576,077
Dividend from warrant valuation - 460,877 51,268 979,595 1,967,000
BGDC Preferred Stock dividends - - 2,920,325 - 2,920,325
----------- ------------- --------- ------------ -------------------------
Total - 1,612,908 3,294,381 3,427,988 12,217,477
----------- ------------- --------- ------------ -------------------------
----------- ------------- --------- ------------ -------------------------
</TABLE>
5. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
Preferred Stock issued during the fiscal year did not
8
<PAGE>
reflect the value of the detachable stock purchase warrants issued in
connection with the 1997 Private Placement described in Note 4. The fair
value of such warrants, as calculated by an independent valuation consulting
firm, was $1,967,000, and is being recorded as a return to the Preferred
Stockholders from the date of issue of the Preferred Stock to the date in
which the Preferred Stock was eligible for conversion into Common Stock. As a
result, net loss applicable to Common Shareholders and net loss per share for
the quarter ended September 30, 1997 and six months ended September 30, 1997
have been restated from the amounts previously reported. Such restatement
resulted in increases of $461,000 and $980,000 in both capital in excess of
par value and the deficit accumulated in development stage for the quarter
and six months ended September 30, 1997, respectively.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
Quarter Six Months
ended Quarter ended Six Months
September 30, ended September 30, Ended
1997 September 30, 1997 September 30,
As Previously 1997 As Previously 1997
Reported As Restated Reported As Restated
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Convertible
preferred stock
dividends $ 1,152,031 $ 1,612,908 $ 2,448,393 $ 3,427,988
------------ ------------ ------------ ------------
Net loss applicable
To common
Shareholders $ (2,482,232) $ (2,943,109) $ (4,714,043) $ (5,693,638)
------------ ------------ ------------ ------------
Net loss per
Share of
Common stock-
Basic and diluted $ (0.29) $ (0.34) $ (0.56) $ (0.68)
------------ ------------ ------------ ------------
</TABLE>
6. PROPOSED MERGER
On November 2, 1998, the Company entered into a non-binding Letter of Intent
("LOI") to merge with Procept, Inc. ("Procept"), a biopharmaceutical company
engaged in the development of novel drugs for the prevention of infectious
diseases. Both companies will work together to enter into a definitive merger
agreement by November 19, 1998. The LOI provides that each of the Company's
shares of common stock (including preferred stock on an as converted basis into
common stock) will convert into 0.12 shares of Procept common stock or a total
of 2,755,000 Procept shares (of which 1,287,647 shares of Procept common stock
to be issued in the merger to the holders of the Company's preferred stock
shall be accompanied by certain contractual rights identical to contractual
rights held by purchasers in Procept's 1998 private placement). In addition,
Procept has agreed to assume an approximately $7.3 million obligation of the
Company's subsidiary, BG Development Corp., and Procept has agreed to exchange
all of the Company's outstanding warrant, unit purchase option and stock option
obligations into like instruments of Procept. The merger remains contingent
upon several conditions including (i) satisfactory due diligence by the Company
and Procept; (ii) fairness opinions by independent investment bankers; and
(iii) the final approval by both companies' shareholders.
9
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INCORPORATED SEPTEMBER 23, 1983
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
Total revenues aggregated $57,000 for the quarter ended September 30, 1998, an
$8,000 increase from revenues of $65,000 recorded during the same period of the
prior year. Current and prior year quarter revenues relate primarily to
interest income generated on the Company's cash balances.
Cost of product sales in the current quarter were $8,000 or a $14,000 decrease
from the same quarter in the prior year. The current year cost of product sales
are fixed costs which relate to the Company's Periodontal Tissue Monitor (PTM)
product, even though the Company had no sales of the PTM product in the current
quarter. During the same quarter of the prior year, the Company completed
product validation studies required by the FDA and began producing PTM kits in
anticipation of the U. S. product launch in October 1997.
Product development costs totaled $595,000 for the current quarter, a decrease
of $66,000 or 10% over the prior year second quarter costs of $661,000. The
decrease relates to the following areas: (i) decrease of $337,000 in funding
of product development expenses in accordance with the Agreement and Plan of
Merger with Binary Therapeutics, Inc. ("BTI"), the holder of certain
technologies in the area of Photodynamic Therapy ("PDT") for the treatment of
cancer; (ii) a decrease of $72,000 in expenses related to Cancer Immunotherapy
technology; (iii) a decrease of $53,000 in expenses related PTM product
development; (iv) an increase of $408,000 in expenses related to the
development of the Company's O6 Benzylguanine ("BG") technology acquired in
March 1998 and (v) a decrease of $5,000 in general product development
expenses.
General and administrative expenses for the current quarter were $376,000, a
decrease of $287,000 from the same period of the prior year. In the prior year,
the Company incurred significant legal and accounting fees related to the
registration of the securities sold in the recent private placement and began
the recognition of an 18 month financial advisory agreement in which the
Company has granted a preferred stock purchase option in exchange for such
services. Also during the same quarter, the Company also incurred $181,000 of
relocation expenses in connection with the relocation of its Chairman,
President and Chief Executive Officer from New Jersey to California. There were
no such expenses incurred during the same quarter of the current year.
Business development costs for the current quarter totaled $5,000, a decrease
of $44,000, from the same quarter of the prior year. Expenses decreased as the
Company spent less time and resources in developing corporate partnerships for
its various products compared to the prior year.
10
<PAGE>
Net loss for the quarter ended September 30, 1998 totaled $847,000 or a 36%
decrease over the prior year's second quarter loss of $1,330,000. This decrease
is primarily the result of lower general and administrative and product
development expenses described above. Basic and diluted net loss per share of
common stock for the quarter ended September 30, 1998 was $.07 compared to $.34
in the same quarter in the previous year. During the quarter ended September
30, 1997, the Company recognized a non-cash convertible preferred stock
dividend of $1,613,000, as restated. No such dividend was recognized during the
current year quarter.
SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
Total revenues were $103,000 for the six months ended September 30, 1998, a
$64,000 decrease from revenues of $167,000 recorded during the same period of
the prior year. Current and prior year revenues relate primarily to interest
income generated on the Company's cash balances.
Cost of product sales was $28,000, relating to quality assurance and patent
amortization expenses on the Company's Periodontal Tissue Monitor (PTM)
product. During the same quarter of the prior year, the Company completed
product validation studies required by FDA the and began producing PTM kits in
anticipation of the U. S. product launch in October 1997.
The Company continued work on its first human clinical trial for its PDT cancer
treatment, Boronated Porphyrin (BOPP). The Company also completed its
evaluation and due diligence of the BG compound. Product development costs for
the six months ended September 30, 1998 decreased by $42,000 or 4% to $980,000
compared to the same period of the prior year. The decrease related to the
following areas: (i) a decrease of $415,000 in funding of product development
expenses for BOPP; (ii) an increase of $537,000 on expenses for the acquisition
and development of BG (iii) $50,000 decrease in expenses related to Cancer
Immunotherapy technology; (iv) a decrease of $99,000 in expenses related to PTM
product development, as the PTM product was approved by the FDA during the
first quarter of the prior year and has moved out of the product development
phase.
General and administrative expenses for the current year were $777,000, a
decrease of $421,000 from the same period of the prior year. The Company
incurred significant legal and accounting fees related to the registration of
the securities sold in the recent private placement and began the recognition
of an 18 month financial advisory agreement in which the Company has granted a
preferred stock purchase option in exchange for such services. The Company also
incurred $181,000 in relocation expenses during the six months ended September
30, 1997 in connection with the relocation of its Chairman, President and Chief
Executive Officer from New Jersey to California. There were no such costs
incurred during the current year.
Business development costs for the current quarter totaled $23,000, a decrease
of $99,000, from the same quarter of the prior year. Expenses decreased as the
Company spent less time and resources in developing corporate partnerships for
its various products compared to the prior year.
Net loss for the six months ended September 30, 1998 totaled $1,638,000 or a
28% decrease over the prior year loss of $2,266,000. This decrease is primarily
the result of lower general and administrative and product development
expenses described above. Basic and diluted net loss per share of common stock
for the six months ended September 30, 1998 was $.44 compared to $.68 in the
same period in the previous year. During the six months ended September 30,
1998, the
11
<PAGE>
Company recognized a non-cash convertible preferred stock dividend of
$3,294,000 compared to $3,248,000 (as restated) during the same period in the
prior year.
CAPITAL RESOURCES AND LIQUIDITY
As described in Note 6 to the Consolidated Financial Statements, the Company
has entered into a non-binding Letter of Intent to merge with Procept, Inc. The
merger is subject to the execution of a definitive merger agreement and other
contingencies, including approval of the merger by the Company's shareholders.
Cash and cash equivalents at September 30, 1998 totaled $4,285,000, an increase
of $995,000 from the March 31, 1998 balance. Working capital at September 30,
1998 increased by $1,048,000 from March 31, 1998 to $3,595,000. These increases
were primarily due to the closing on net proceeds of $2,455,000 of the BGDC
private placement financing offset by the net loss before convertible preferred
stock dividends for the six months ending September 30, 1998. Seventy five
percent of the net proceeds of the BGDC private placement will be used by BGDC
for development costs associated with BG and 25% will go to the Company to be
used for general purposes. In order to conserve cash, the Company has
instituted a plan to reduce its cash burn rate.
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. Without significant
future revenues, the Company's financial resources are anticipated to be
adequate through June 1999, based on a continuation of the pattern of expenses
which have prevailed during fiscal years 1998 and 1997. Unanticipated expenses
or working capital requirements could, however, shorten that period.
In March 1998, the Company signed a license agreement for the drug compound O(6)
Benzylguanine ("BG") with the owners of the patents: Pennsylvania State
University, the National Institutes of Health (NIH), the University of Chicago,
and Case Western Reserve University, (collectively, the "Co-Owners"), and in
turn, assigned it to its subsidiary BGDC.
The Company entered into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. Under the terms of
the CRADA, the Company is obligated to provide funding of $125,000 per year for
five years for joint research. The Company is also obligated to make additional
milestone, royalty and patent reimbursement payments to the Co-Owners during
the term of the License Agreement. The agreement also has a provision in which
the Company may make certain portions of the aforementioned payments in common
stock of the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount Capital Investments LLC ("PCI"). The
Company paid PCI a commission of $100,000 plus 100,000 shares of the Company's
common stock valued at $75,000 and reimbursed PCI $100,000 for its expenses in
connection with the acquisition of the BG technology. The Company is also
obligated to make milestone payments to PCI in the Company's common stock of up
to 900,000 shares if the BG compound successfully reaches certain milestones.
The Company recorded $408,000 in product development expenses during
12
<PAGE>
the second quarter of FY 1999 and $837,000 since inception of the program to
develop the BG technology.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately
held, development stage enterprise holding certain technologies for the PDT
treatment of cancer. Under the agreement as amended, the Company recorded
expenses of $153,000 during the second quarter of FY 1999 and $3,231,000 since
inception of the agreement, and is currently funding substantially all expenses
of BTI. The company expects to continue funding such expenses until the Company
determines if it will elect to exercise its option to acquire BTI. There can be
no assurance that the Company will exercise its option to acquire BTI.
The Company has an agreement with Wound Healing of Oklahoma ("WHO") under which
it acquired an exclusive license to certain proprietary technology for Cancer
Immunotherapy. The Company incurred $26,000 during the first quarter of FY 1999
and $719,000 in product development expenses since the acquisition of the
license and expects to continue funding such efforts associated with the
commercialization of the licensed technology, including the commencement of
human clinical trials, which will increase the Company's net utilization of
cash. However, there can be no assurance that FDA and other regulatory
approval required to commence such trials will be forthcoming.
On September 18, 1998, the Company's common stock was removed from trading on
the American Stock Exchange ("AMEX") because the Company no longer satisfies
all of the financial guidelines of the AMEX for continued listing. The
Company's common stock began trading on the NASD Electronic Bulletin Board on
September 21, 1998 under the ticker symbol PHAA.
YEAR 2000 COMPLIANCE. The Company recognizes the need to ensure its operations
will not be adversely impacted by the inability of the Company's systems to
process data having dates on or after January 1, 2000 ("Year 2000"). Processing
errors due to software failure arising from calculations using the Year 2000
date are recognized as a risk. The Company is currently assessing the risk,
with respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business to assess whether they are or will be Year 2000 compliant.
The Company's information technology systems consist of a series of personal
computers which process data using purchased software programs produced and
maintained by large software vendors. All of the software presently installed
on the Company's systems is Year 2000 compliant.
The Company has contacted all of its vendors to determine each vendors'
compliance with Year 2000 issues. As of September 30, 1998, 60% of all of the
Company's vendors have responded that they are now Year 2000 compliant. The
Company is continuing to determine the Year 2000 compliance status of the
remaining vendors. The Company hopes to have responses from all vendors and
institutions with whom it does business by December 31, 1998. The Company's
critical suppliers and financial institutions are large organizations and the
Company believes all are now or will be Year 2000 compliant by December 31,
1999.
13
<PAGE>
The Company believes its exposure to any material Year 2000 problems is
relatively small because its financial and operating systems have been produced
and maintained by large software vendors which are Year 2000 compliant and the
Company relies on very large Year 2000 compliant vendors for its critical
services. However, there can be no assurance that the Company's systems or
systems of other companies on which the Company's operations rely will be
converted on a timely basis and will not have a material effect on the Company.
The cost of the Company's Year 2000 initiatives has not been or is not expected
to be material to the Company's results of operations or financial position.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on August 13, 1998, the following matters
were voted on and approved:
1. Six Directors were elected to the Board of Directors to hold office for a
one-year term or until their successors are elected and qualified. The
following persons were elected: Dr. H. Laurence Shaw, Mr. Jack Halperin,
Mr. John G. Kringel, Mr. Elliott H. Vernon, Dr. Robert A. Vukovich and
Mr. Michael S. Weiss. 18,250,779 voting shares voted in favor of all of
the Directors, or 98.3%, and 309,316, or 1.7% abstained. On October 1,
1998, Mr. Kringel resigned his position as a director of the Company.
2. To authorize the Company to enter into and perform agreements, in
connection with a private placement financing by the Company and the
Company's subsidiary, BG Development Corp. ("BGDC"), to exchange shares of
BGDC Convertible Preferred Stock for shares of the Company's Common Stock
under certain circumstances. 12,477,699 voting shares voted in favor, or
96.7%, 366,456 voting shares voted against, or 2.8%, and 53,590, or .4%
abstained.
3. To ratify the Board of Directors selection of Deloitte & Touche LLP as
the Company's independent public accountants for the fiscal year ending
March 31, 1999. 18,241,287 voting shares voted in favor, or 97.8%, 318,808
voting shares voted against, or 1.7%, and 97,685, or .5% abstained.
ITEM 5. OTHER INFORMATION
On November 2, 1998, the Company entered into a non-binding Letter of Intent
("LOI") to merge with Procept, Inc. ("Procept"), a biopharmaceutical company
engaged in the development of novel drugs for the prevention of infectious
diseases. Both companies will work together to enter into a definitive merger
agreement by November 19, 1998. The LOI provides that each of the Company's
shares of common stock (including preferred stock on an as converted basis into
common stock) will convert into 0.12 shares of Procept common stock or a total
of 2,755,000 Procept shares (of which 1,287,647 shares of Procept common stock
to be issued in the merger to the holders of the Company's preferred stock
shall be accompanied by certain contractual rights identical to contractual
rights held by purchasers in Procept's 1998 private placement). In addition,
Procept has agreed to assume an approximately $7.3 million obligation of the
Company's subsidiary, BG Development Corp., and Procept has agreed to exchange
all of the
14
<PAGE>
Company's outstanding warrant, unit purchase option and stock option
obligations into like instruments of Procept. The merger remains contingent
upon several conditions including (i) satisfactory due diligence by the
Company and Procept; (ii) fairness opinions by independent investment
bankers; and (iii) the final approval by both companies' shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ----------------------
<S> <C>
10.43 Letter of Intent concerning merger, dated as of November 2, 1998,
between the Company and Procept, Inc.
99 Press Release dated November 5, 1998 announcing signing of Letter of
Intent concerning merger between the Company and Procept, Inc.
</TABLE>
REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Date of Report Item Reported Financial Statements Filed
- ---------------- -------------- -------------------------
<S> <C> <C>
September 15, 1998 Item 5-Other Events
(Delisting notice No
From AMEX)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Pharmaceuticals, Inc.
Date: November 13, 1998 /s/ James Hertzog
----------------------------------
James Hertzog
Controller
(Principal Accounting Officer and
duly authorized to sign this report on
behalf of the registrant)
15
<PAGE>
EXHIBIT 10.43
PROCEPT, INC.
840 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
CONFIDENTIAL
November 2, 1998
Dr. H. Laurence Shaw
President and Chief Executive Officer
Pacific Pharmaceuticals, Inc.
6730 Mesa Ridge Road, Suite A
San Diego, CA 92121
Re: LETTER OF INTENT
Dear Dr. Shaw:
This letter is intended to confirm recent discussions between Procept,
Inc., a Delaware corporation ("Procept"), and Pacific Pharmaceuticals, Inc. , a
Delaware corporation ("Pacific") regarding the terms which will form the basis
for our efforts to reach a definitive agreement regarding the proposed merger
of Pacific and Procept (the "Merger"). It is expressly agreed that, with the
limited exceptions of Sections 2 and 4, which shall be legally binding, this
letter does not constitute a firm proposal, offer or enforceable agreement to
consummate the Merger, is not legally binding on either of the parties and
imposes no duty or obligation on either of them to proceed with the proposed
transaction. In the event that a definitive agreement to consummate the Merger
is not signed by November 19, 1998, the binding provisions of Sections 2.1
shall terminate, and the parties shall have no further obligations except as
stated in Sections 2.2 and 4.
1. PREPARATION OF DEFINITIVE AGREEMENT. Counsel for Procept and for
Pacific will prepare a definitive agreement for submission to and approval by
the boards of directors and stockholders of each of Procept and Pacific and
Procept will thereby succeed to and acquire the business of Pacific (the
"Business"). Procept and Pacific acknowledge agreement in principle to the
following terms and conditions of the transaction:
1.1 PROPOSED MERGER. For the consideration set forth below, Pacific
will merge with and into Procept. All of the outstanding capital stock,
options, warrants and other rights to acquire an interest in the capital
structure of Pacific will convert into the aggregate securities specified in
Section 1.2 below.
1.2 CONSIDERATION. On the date of the closing of the transaction
(the "Closing Date"), Procept shall deliver:
(a) to the Pacific stockholders 2,755,000 shares of Procept
Common Stock (of which the 1,287,647 shares of Procept Common Stock that will
be issued in the Merger
<PAGE>
to the holders of Pacific Preferred Stock shall be accompanied by certain
contractual rights identical to contractual rights held by purchasers in
Procept's 1998 private placement); and
(b) to the holders of outstanding options and warrants to
purchase Pacific stock, options and warrants to purchase Procept Common Stock
exercisable for that number of shares of Procept Common Stock which such option
or warrant holder would have been entitled to receive if the underlying Pacific
shares had converted in the Merger, at an exercise price per share equal to the
aggregate exercise price of the Pacific option or warrant exchanged divided by
the number of shares of Procept Common Stock subject to the new option or
warrant, and otherwise having the same terms and conditions as the Pacific
option or warrant.
1.3 CERTAIN ASSUMED RIGHTS AND OBLIGATIONS. Each of Procept and
Pacific acknowledges that by virtue of the Merger, Procept will acquire the
equity interest of Pacific in BGDC and will be subject to the obligations of
Pacific to the other stockholders of BGDC.
1.4 STOCKHOLDER APPROVAL; FAIRNESS OPINIONS. Each of Procept and
Pacific will promptly seek stockholder approval of the Merger after the
execution of the definitive merger agreement. Prior to the solicitation of
proxies or consents from stockholders (or the mailing of an information
statement in lieu thereof), each of Procept and Pacific will obtain fairness
opinions from a reputable investment banking firm with respect to the Merger,
copies of which shall be provided to the stockholders of each company.
1.5 FORM OF TRANSACTION, TAX AND ACCOUNTING TREATMENT. The final
form of the transaction will be determined by Procept and Pacific after
consultation with their legal, tax and accounting advisors. It is currently
contemplated that the transaction will be tax-free to Procept, Pacific and
their respective stockholders. Procept anticipates the transaction will be
recorded using "purchase accounting."
1.6 EMPLOYMENT AND CONSULTING AGREEMENTS. Certain Pacific employees
may enter into employment agreements or consulting and confidentiality
agreements. Prior to the execution of a definitive agreement, the parties
shall identify each such person by name and title and determine his or her term
of employment or consultation and compensation. Prior to the Closing Date, all
of such agreements will be completed and signed by all parties.
1.7 REGISTRATION OF SHARES; RESTRICTIONS ON RESALE. The shares of
Procept Common Stock delivered in the Merger will have been registered under
the Securities Act of 1933, as amended (the "Act"), on Form S-4. As a result,
the shares of Procept Common Stock will be freely tradable following the
Merger, subject to the provisions of Rule 145 under the Act.
1.8 TIMING. It is the intention of the parties to sign the
definitive agreement no later than November 19, 1998.
1.9 REPRESENTATIONS AND WARRANTIES. The definitive agreement will
contain representations and warranties to the extent customary for merger
transactions involving the acquisition of a public company.
1.10 CONDITIONS TO CLOSING. As proposed to be structured, the
signing of the definitive agreement is conditioned on the approval of the
transaction by the Boards of Directors
2
<PAGE>
of Procept and Pacific. The consummation of the transactions to be set forth
in the definitive agreement shall be subject to the following additional
terms and conditions:
1.10.1 Each of Procept and Pacific shall have received
satisfactory responses to its requests for information from the other
party and each of the parties shall have completed its customary due
diligence review to its satisfaction, including review of the
financial results of the Business of Procept and Pacific for the last
five years.
1.10.2 Pacific and Procept shall each have received approval
of their respective stockholders and all other approvals, clearances
and consents from any governmental entities and other third parties
necessary or desirable for the consummation of the Merger and the
Pacific shares shall be free and clear of any lien or encumbrances.
1.10.3 Procept or its independent public accountants shall
have (i) completed a review of the revenues and expenses of the
Business; (ii) confirmed to Procept's satisfaction that Pacific's
financial statements fairly present in all material respects the
results of operations and cash flows resulting from the Business in
conformity with generally accepted accounting principles; and (iii)
confirmed to Procept's satisfaction that Pacific's financial records
are adequate to permit Procept to fulfill its SEC financial reporting
obligations in connection with the exchange and in connection with
Procept's future registered financings without unreasonable effort or
expense.
1.10.4 To the extent necessary, each holder of an outstanding
Pacific option or warrant shall consent to the exchange of such
option or warrant for an option or warrant exercisable for Procept
Common Stock, as contemplated by Section 1.2(b) above.
1.10.5 Pacific shall have exercised the option agreement
between BTI and Pacific and issued Pacific Common Stock upon exercise
thereof.
1.10.6 Such other closing conditions as are customary in a
transaction of this type.
1.11 EXPENSES. The definitive agreement will contain provisions
whereby Procept and Pacific shall each bear their own costs if the transaction
is not consummated. If the transaction is consummated, Procept will discharge
expenses of both parties.
2. AGREEMENT NOT TO ENTERTAIN OTHER OFFERS. In consideration of the
efforts and expenses undertaken by both parties in pursuing the contemplated
Merger and other valuable consideration, the receipt and adequacy of which are
acknowledged, the parties agree as follows:
2.1 Until November 19, 1998 (or such earlier time as Procept and
Pacific agree to abandon the transactions contemplated by this Letter), neither
Pacific nor Procept nor any of their respective authorized representatives may:
3
<PAGE>
(i) directly or indirectly, solicit any proposal relating to the
acquisition by another party of all or any portion of the capital stock of such
company or substantially all of the assets of such company (whether by merger
or otherwise);
(ii) directly or indirectly, engage in any discussions or negotiations
with any other party regarding any such acquisition, or otherwise encourage or
facilitate any efforts by any other party to engage in such an acquisition; or
(iii) sell, transfer or dispose of all or any portion of the capital stock
of such company or substantially all of the assets of such company (whether by
merger or otherwise);
PROVIDED HOWEVER, that nothing in the foregoing shall restrict either company
from engaging in discussions with potential collaborative partners, subject to
such company disclosing to the other the identity of the party involved in such
discussions and the general nature thereof; and PROVIDED FURTHER that,
notwithstanding the foregoing, each such company and its authorized
representatives may participate in discussions or negotiations with, provide
information to, and consummate a transaction with, a third party which would
otherwise be prohibited by this section, if (A) such discussions or
negotiations had been commenced prior to the date hereof or if commenced after
the date hereof, were not solicited by or on behalf of such company and (B)
such discussions or negotiations were being continued or initiated after
consultation with and based upon written advice of independent legal counsel
which determined in good faith that such action is necessary for the Board of
Directors of the involved company to comply with its fiduciary duties to its
stockholders under applicable law.
2.2 In the event that during the period between the date hereof and
November 19, 1998, either Pacific or Procept breaches its obligations under
Section 2.1 or engages in discussions or negotiations with, provides
information to, or consummates a transaction with a third party, which activity
would have been a breach of Section 2.1 but for the second proviso of such
section, then, unless a definitive agreement relating to the Merger is
subsequently executed by the parties hereto, on the earlier of (i) the
consummation of any such transaction with a third party or (ii) December 31,
1998, such company shall pay the other a termination fee in the amount of
$50,000, in immediately available funds to an account designated by the
recipient party. The parties acknowledge and agree that the provisions for
payment of such a termination fee are included herein in order to induce each
party to enter into this agreement and to reimburse the non-terminating party
for incurring the costs and expenses related to the contemplated Merger. No
more than one termination fee shall be paid by any party hereunder. The
parties hereto agree that any termination fee that is paid or due hereunder
shall be deemed to be liquidated damages designed to reasonably compensate the
recipient party for the loss incurred by the terminating party's actions.
2.3 Any definitive agreement between the parties regarding the
Merger shall include a provision parallel to Sections 2.1 and 2.2 hereof,
provided that (i) the obligations of Section 2.1 shall continue until the
earlier of the closing of the Merger or the termination of such definitive
agreement, and (ii) the termination fee shall be in the amount of $150,000 and
shall be payable in the event of a breach by a party of the definitive Merger
agreement or a
4
<PAGE>
recommendation by the Board of Directors of a party that such company's
stockholders approve or accept a transaction with a third party of the type
described in clause (iii) of Section 2.1.
3. INVESTIGATION OF BUSINESS AND OPERATIONS OF PACIFIC. Pending
the preparation, execution and delivery of the definitive agreement and
continuing until the Closing Date or termination of this Letter of Intent (i)
Pacific will cause officers and representatives of Pacific (including without
limitation Pacific's firm of independent certified public accountants) to
furnish access to such books and records of Pacific during normal business
hours as Procept, its representatives or agents, may reasonably request in
connection with its review and investigation of the business and operations,
assets and liabilities of Pacific and the market potential for the Business,
and (ii) Procept will cause its officers and representatives (including without
limitation, Procept's firm of independent certified public accountants) to
furnish access to such books and records of Procept during normal business
hours as Pacific, its representatives or agents, may reasonably request in
connection with the review and investigation by it or the Stockholders of the
business and operations, assets and liabilities of Procept.
4. CONFIDENTIALITY. As provided in the Confidentiality Agreement
between the parties, the existence and the terms of this Letter of Intent and
the transactions contemplated herein shall be maintained in confidence by the
parties hereto. Except to the extent required by law, all public
announcements, notices or other communications regarding such matters to third
parties shall require the prior approval of Procept and Pacific.
5. GENERAL. This Letter of Intent is executed and shall be governed by,
and construed and enforced (to the extent the Sections are stated herein to be
enforceable) in accordance with, the laws of The Commonwealth of Massachusetts.
If you determine that the foregoing is satisfactory in principle, we would
appreciate acknowledgment of that determination by the execution and delivery
to us of the enclosed copy of this letter.
We look forward to your favorable consideration of this letter.
Very truly yours,
PROCEPT, INC.
/s/ John F. Dee
------------------
John F. Dee
President and Chief Executive Officer
5
<PAGE>
The foregoing is agreed to and accepted as of the date first set forth
above.
PACIFIC PHARMACEUTICALS, INC.
/s/ Dr. H. Laurence Shaw
------------------------
Dr. H. Laurence Shaw
President and Chief Executive Officer
6
<PAGE>
EXHIBIT 99
Contacts: PROCEPT, INC. PACIFIC PHARMACEUTICALS, INC.
James Ankner/Mary Ann Dunnell Linda B. Preucil
Robinson Lerer & Montgomery Director of Business Relations
212/484-7697/212-484-7797 908/497-0160
[email protected] [email protected]
www.procept.com www.PacificPharm.com
- -------------------------------------------------------------------------------
FOR IMMEDIATE RELEASE
PROCEPT AND PACIFIC PHARMACEUTICALS
ENTER INTO LETTER OF INTENT REGARDING MERGER DISCUSSIONS
CAMBRIDGE, MA, AND SAN DIEGO, CA, NOVEMBER 5, 1998 - Procept, Inc. (Nasdaq:
PRCT) and Pacific Pharmaceuticals, Inc. (OTC: PHAA) today announced that they
have signed a letter of intent which contemplates the merger of Pacific
Pharmaceuticals, Inc. into Procept, Inc. Boards of directors at each company
have approved the continuance of negotiations toward the signing of a
definitive merger agreement.
Both companies' managements are supportive of the proposed merger, which
would effectively consolidate resources and drug development expertise to
further advance both ongoing research programs. "Joining forces with Pacific
Pharmaceuticals is consistent with Procept's objective to identify clinical
candidates with the potential for both a significant medical advancement and
accelerated approval. The merger would provide a focus in anti-infectives
and oncology, which is aligned with this strategy. The resulting expansion
of the Company's product portfolio would position Procept for successful
growth," commented Mr. John F. Dee, President and Chief Executive Officer of
Procept, Inc. "The combined strength of the two companies will facilitate
the development of each company's key programs," stated H. Laurence Shaw,
M.D., Chairman, Chief Executive Officer and President of Pacific
Pharmaceuticals, Inc. "In this era of depressed capital markets, a merger
would provide resources to position the companies more favorably to reach
critical milestones and secure appropriate strategic partnerships."
TERMS OF THE TRANSACTION
As currently contemplated, each Pacific share will convert into approximately
0.12 Procept common shares. In addition, (a) Procept will assume an
approximately $7.3 million obligation in connection with a Pacific
Pharmaceuticals subsidiary BG Development Corp.; and (b) in exchange for the
waiver of certain liquidation rights, Pacific preferred shareholders will
receive certain contractual rights from Procept. Further details pertaining
to the terms of the merger will be released in the event that a definitive
merger agreement is signed.
The companies expect that the available working capital after consummation of
the transaction, combined with the existing and anticipated government
research agreements, would fund the merged entity's current programs for
approximately two years.
- more -
<PAGE>
2
The closing under such a definitive merger agreement would be contingent upon
several conditions including (a) satisfactory due diligence by both parties;
(b) fairness opinions by independent investment bankers; and (c) the final
approval of the transaction by one or both companies' shareholders. At this
stage of the discussions, the outcome of these and other contingencies is
unknown.
Procept, Inc. is a biopharmaceutical company engaged in the development of
novel drugs with a focus in anti-infectives and immunosuppressants.
Procept's proprietary lead infectious disease candidate in human clinical
trials is PRO 2000 Gel, a vaginal, topical microbicide designed to provide
protection against HIV (human immunodeficiency virus) and other sexually
transmitted diseases. Procept's immunosuppressive research program targets
an intracellular T-cell enzyme DHODH (dihydrooratate dehydrogenase) that
helps to activate the immune response. Patent applications have been filed
for a series of lead DHODH compounds which may provide target opportunities
for treating immune system disorders such as rheumatoid arthritis, and for
preventing transplant rejection.
Pacific Pharmaceuticals, Inc. is a public research and development company
engaged in the development of cancer therapies, two of which are in human
clinical trials. The Company manages the products through pre-clinical,
clinical development and regulatory approval to position them for successful
commercialization. Pacific is developing a chemosensitizing agent to
overcome cancer drug resistance in brain and other cancers, a photodynamic
therapy boronated porphyrin (BOPP) molecule for use in hyperproliferative
disorders including pre-cancerous conditions, cancers, and non-cancerous
disorders such as vascular restenosis and endometriosis, and an immunotherapy
for the treatment of metastatic cancer.
THIS NEWS RELEASE CONTAINS FORWARD LOOKING STATEMENTS. THERE CAN BE NO
ASSURANCE THAT PACIFIC PHARMACEUTICALS, INC. OR PROCEPT, INC. INDIVIDUALLY OR
JOINTLY, WILL DEVELOP COMMERCIALLY VIABLE PRODUCTS, ACHIEVE STRATEGIC
PARTNERSHIPS, WILL COMPLETE CLINICAL TRIALS ON A SUCCESSFUL BASIS, OR THAT
THE MERGER BETWEEN PACIFIC PHARMACEUTICALS AND PROCEPT WILL BE CONSUMMATED
AND, IF CONSUMMATED, BE SUCCESSFUL. THE ACTUAL RESULTS COULD VARY FROM THOSE
EXPECTED DUE TO A VARIETY OF RISKS SET FORTH FROM TIME TO TIME IN EACH OF THE
COMPANIES' FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING
PACIFIC PHARMACEUTICALS' FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998 AND
PROCEPT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. THE COMPANIES
UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY OF THESE
FORWARD LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
# # #
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
PHARMACEUTICALS SECOND QUARTER FY 1999 CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,285,460
<SECURITIES> 0
<RECEIVABLES> 201
<ALLOWANCES> 0
<INVENTORY> 54,587
<CURRENT-ASSETS> 4,438,316
<PP&E> 292,629
<DEPRECIATION> (232,971)
<TOTAL-ASSETS> 4,642,248
<CURRENT-LIABILITIES> 843,002
<BONDS> 20,396
0
5,653,088<F2>
<COMMON> 244,516
<OTHER-SE> (2,119,348)
<TOTAL-LIABILITY-AND-EQUITY> 4,642,248
<SALES> 0
<TOTAL-REVENUES> 103,370
<CGS> 27,578
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,799,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,637,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,294,381<F1>
<CHANGES> 0
<NET-INCOME> (4,932,328)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
<FN>
<F1>CONVERTIBLE PREFERRED STOCK DIVIDENDS
<F2>INCLUDES MINORITY INTEREST OF $4,731,594
</FN>
</TABLE>
